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Rising high on innovation

Orient Electric Ltd. (OEL) is part of the diversified USD 2.4 billion Indian conglomerates CK Birla group. OEL is a 60-year-old brand in fans and has established itself as a one-stop brand for lifestyle electrical solutions which include fans, lighting, home appliances and switch gears. Orient Electric has manufacturing facilities in Kolkata, Faridabad and Noida. The company enjoys a marketing presence across 35 countries. In the domestic market, it has a robust sales/ distribution network and service network with pan-India coverage.

Investment Rationale

* Strong brand presence to aid growth in the ECD segment:

Post its demerger from Orient Paper & industries in FY17, OEL has emerged as one of the strong players in the electrical consumer durables space. In the fans segment, OEL is the third-largest player and enjoys a strong brand recall. It is also the largest exporter of fans in India. OEL not only focuses on the entry-level segment in fans but also through its in-house R&D has re-invented its offerings, thus focusing on premiumization.

Leveraging its expanding distribution reach and strong brand connect, OEL has diversified into related product categories in the ECD segment such as air coolers, kitchen appliances and water heaters. Going forward, with the government’s increased push on housing coupled with OEL’s constant focus on innovation, strong brand presence and increasing distribution reach, we expect OEL’s ECD revenue (contributes 75% in FY21) to grow at 17.5% CAGR over FY21-24E.

* Lighting & Switchgear segment well poised for growth:

OEL forayed into the lighting business in 2008 and through constant innovation and many firsts in the industry, it has emerged as one of the top players. Despite headwinds in the lighting industry to pricing, OEL’s lighting business posted industry-leading growth & profitability.

The growth momentum is expected to strengthen both in B2B and B2C segments led by the government’s focus on infrastructure spending coupled with constant efforts at innovation, improving distribution and entry into the e-commerce segment. OEL ventured into the switchgear segment in FY16 with a differentiated technology proposition centred on safety and a premium positioning. We expect growth momentum to pick up gradually on the back of revival in institutional demand and increased preference for smart and connected products.

Outlook & Valuation

We like OEL on the back of its brand connect strong management team and growing distribution network. Its constant focus on innovation and strong design capabilities would help the company gain market share, especially from unorganized players. Moreover, strong free cash generation and superior return ratios are key positives for the company. After a muted show in FY21 due to the pandemic, we expect OEL’s revenue to grow at 17.5% CAGR over FY21-24E led by a recovery in both ECD and lighting & switchgear segment. On the margins front, higher operational efficiencies coupled with the focus on premiumization would aid margin improvement for OEL. We estimate OEL’s Revenue/EBITDA/PAT to grow at 17.5%/18.6%/24.8% over FY21-24E. We recommend a Buy on the stock with a target price of Rs. 439.

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